We maintain HOLD on Suria Capital with higher DCF-derived fair value (FV) of RM1.40/share (vsRM1.15/share previously). Our FV implies a FY23F PE of 8x, which is close to its 5-year average of 8.5x. There is no FV adjustment for ESG based on our 3-star rating.
1QFY23 core net profit (CNP) of RM17mil (after adjusting for loss from disposal on concession assets of RM7mil) was above expectations, accounting for 35% of our FY23F earnings and 34% of consensus estimates.
The deviation is mainly due to lower-than-expected depreciation and amortisation expenses as the Sabah State government has granted the group’s port concession extension until 2064. As such, we raise our earnings estimates for FY23F-24F by 28%.
On a YoY basis, port operating revenue grew 6% to RM58mil in 1QFY23 despite lower cargo (-12% YoY) and container (- 3% YoY). Coupled with lower depreciation and amortisation charges, CNP expanded 23% YoY to RM17mil in the quarter.
Meanwhile, port operating revenue fell 11% QoQ, dragged by lower container (-11% QoQ) and cargo (-7% QoQ) throughput. However, CNP expanded 75% to RM17mil QoQ mainly due to lower depreciation and amortisation charges.
Despite the weaker throughput volume in 1QFY23, we expect throughput volume to gradually recover in 2H. Looking ahead, we are optimistic on the long-term outlook for Sabah, which is a key palm oil and crude oil producing state.
A rerating catalyst would come from a revision of port tariffs, which have been unchanged for the past 35 years. The review of its tariff rates was approved in principle by the state cabinet in 2020 for implementation at a later date.
Additionally, the state cabinet also agreed for a 30-year extension to its port operating concession – expiring in 2034F – subject to terms and conditions yet to be finalised.
Suria currently trades at a fair FY23F PE of 7x, 1-standard deviation below its 5-year historical given that valuations are likely to remain depressed amid weakening global economic headwinds that could lead to tepid recovery forthroughput volumes.
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